PM Flashcards
Calculate Information Ratio
Information Ratio = active return / active risk
IR =TC (IC) √BR
BR = breadth
information ratio, which is the average excess portfolio return over the benchmark divided by the standard deviation of the differences between the portfolio and benchmark returns.
Calculate optimal level of active risk
IR/Sharpe Ratio * standard deviation of benchmark returns
weight of benchmark portfolio
Optimal level of active risk / % of active risk
The five main classes of investment constraints are
liquidity, time horizon, legal and regulatory concerns, tax considerations, and unique circumstances
Breadth
Breadth is the number of independent bets (based on unique information) made per year by the active manager.
The primary goals of execution algorithms and high-frequency trading algorithms
The primary goals of execution algorithms are to ensure a fair price and to minimize market impact. High-frequency trading algorithms (not execution algorithms) are designed to earn a profit.
APT model vs Multi factor model
The APT is an equilibrium-pricing model; multi-factor models are “ad-hoc,” meaning the factors in these models are not derived directly from an equilibrium theory. Rather they are identified empirically by looking for macroeconomic variables that best fit the data.
The general form of the two-factor APT model
E(RPort) = RF = λ1β1 + λ2β2, where the λ’s are the factor risk premiums and the β’s are the portfolio’s factor sensitivities
Sharpe Ratio
a measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment.
(Rp - Rf )/std p
The portfolio with the highest information ratio will also be the portfolio with the highest sharpe ratio
true
What will the information coefficient be if the manger is right 50% of the time? and What is the information coefficient of a market timer>
0
IC= 2(% correct) - 1
What is TC for an unconstrained portfolio?
For a constrained active portfolio
TC= 1
TC <1
What is the transfer coefficient
can be thought of as the correlation between actual active weights and optimal active weights
the cross-sectional correlation between forecasted active returns and actual active weights adjusted for risk
What is Painting the tape? Wash trading? Quote stuffing?
Painting the tape is a manipulation where a market participant trades with the top of the order book in order to move the market price in one direction, and then places a larger opposite trade at the new more-favorable price. In wash trading, a trader will rapidly buy and sell the same security in an attempt to artificially inflate the demand for the security. Quote stuffing refers to a trader distracting and disadvantaging other algorithms by placing a great quantity of fictitious orders and then cancelling them almost immediately.
Basket trading and market fragmentation
Basket trading is not a solution to market fragmentation, but rather is an algorithm used for statistical arbitrage. Algorithms can adapt to market fragmentation if the algorithm includes intelligent smart order routing capabilities and/or liquidity aggregation capabilities.
